UK: Strongest rate of business growth for six months

06 November, 2017

UK service providers indicated that business activity growth improved on its recent underwhelming trend in October. The latest expansion of service sector output was the fastest since April, supported by improved order books and resilient client demand, a survey has shown, while a downturn in business optimism about the year ahead, fuelled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned.

Service providers revealed a positive development in terms of operating expenses as the rate of input cost inflation eased to its lowest since September 2016.

However, the rate of job creation slipped to a seven-month low and confidence towards growth prospects remained muted. Fragile sentiment regarding the year-ahead business outlook was linked to entrenched economic uncertainty and worries about business investment among clients.

At 55.6 in October, up from 53.6 in September, the headline seasonally adjusted IHS Markit/CIPS Services PMI Business Activity Index signalled a shift in momentum across the services economy. The latest reading was slightly stronger than the post-crisis trend and signalled the fastest pace of business activity growth for six months.

Survey respondents noted that a rebound in new order growth from September’s 13-month low had helped to lift business activity during October. Incoming new work increased at a solid pace that was the fastest since May. Anecdotal evidence cited a range of factors underpinning new business gains, including improved domestic demand and successful new product launches. In some cases, service providers also indicated a willingness to support sales by partially absorbing the recent spike in their operating expenses to retain competitive pricing.

October data pointed to slower employment growth across the service sector, despite the rebound in business activity and incoming new work. The latest increase in payroll numbers was the weakest since March. Reports from survey respondents suggested that more cautious hiring strategies reflected concerns about the longer-term demand outlook, alongside efforts to alleviate pressure on margins.

There was little sign of stretched operating capacity during October, as backlogs of work decreased for the first time in eight months. Moreover, service providers remain cautious about future workloads, with business optimism well below its long-run trend and still softer than seen on average in the first half of 2017. Input prices continued to rise sharply at service sector firms in October. This was linked to a variety of expenses, including higher food prices, energy bills, transport costs and staff salaries. However, the overall rate of input cost inflation eased to its lowest in over a year. Meanwhile, prices charged inflation continued to rise in October, reaching a six-month high.

Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey: “The latest PMI surveys bring mixed news on the economy. While an upturn in business activity growth adds some justification to the Bank of England’s decision to hike interest rates for the first time in a decade, a deeper dive into the numbers highlights the fragility of the economy and points to downside risks for the outlook.

“The good news was that October saw business activity across services, manufacturing and construction grow at its fastest rate for six months. The data point to the economy growing at a quarterly rate of 0.5%, representing an encouragingly solid start to the fourth quarter.

“However, a downturn in business optimism about the year ahead, fuelled mainly by Brexit-related uncertainty, suggests that risks are tilted to the downside as far as future growth is concerned. Not surprisingly, employment growth slowed for a second successive month as the business mood grew more cautious and risk averse.

“News on prices was also varied. Selling prices rose at an increased rate, but cost pressures eased, the latter suggesting selling future price inflation may cool, taking pressure off any need for further rate hikes any time soon.”

Duncan Brock, Director of Customer Relationships at the Chartered Institute of Procurement & Supply, said: “A mixture of forces were at play this month in the service sector, which reported the strongest growth in new business since May, but optimism remained subdued and there was a squeeze on profit margins as input prices continued to rise.

“Though the headline rate of cost inflation was more muted, businesses were paying more for salaries and for imported goods and those additional costs were being passed on to consumers at the fastest rate since April. Job creation eased to its weakest since March and the hesitancy to hire was partly a consequence of the need to contain rising overheads.

“But the main source of longer-term anxiety continues to be the path to Brexit. Service providers are concerned that political uncertainty is damaging the confidence to invest and weighing down on business optimism among their clients. At the same time, it remains to be seen whether consumers will be spooked by the recent rate rise and will curb their spending, adding to the service sector’s uncertainty about future prospects.”